Financial Statements Monitoring Mechanisms †MyAssignmenthelp.com

Question: Discuss about the Financial Statements Monitoring Mechanisms. Answer: Introduction: Starting a new business is not easy and the trickiest ask is choosing the business to venture into. Different businesses have different challenges and different rewards. A right product or service must be chosen in the first place which needs to be marketed well in order to earn profits and for business to last longer. Understanding the customer demand, the market analysis, the potential target customers and lifestyle today, I would be starting a business in electronics and home appliances. This has been chosen as home appliances and electronics have become a ultimate necessity in the nine to five life of most of the professionals as they spend of their times on TVs, Laptops, music systems, mobiles, etc. (Anon., n.d.) Name of the business would be com. The reason of selecting such a name for the business is it being catchy and the world being so internet oriented and internet bound, it catches minds of the listeners and viewers immediately. Products and services offered: Most of the electronic products would be at offer including video system, music system, television, laptop, etc. Legal form: The legal form chosen would be a limited liability incorporation or company consisting of 2 partners, one partner being my friend who has good business contacts with the vendor, customer, banks, etc. and the other being me. Option of merchandising or manufacturing: We would go with manufacturing of these goods. Option of retail or wholesale outlet: We would be going with the wholesale outlet because of the good margins being available as per the market trend.(Bae, 2017) Size of the business: The expected or the planned size of the business is to be around $ 400000 initially with major portion being on the capital expenditure and the other being on the current assets. Industry: The industry which we would be venturing into will be manufacturing industry. As mentioned in the first part the legal form of the business started would be incorporated company, a LLC. There are various advantages, which it offers like: Protection of personal assets: Both the partners or owners will have limited liability towards the debts of the company and there would be separate legal position of both as a result, the personal assets would be prospected to be confiscated in case of legal dispute or dissolution.(Solicitors, 2016) Authority, legitimacy and credibility of the name: Once Inc. or LLC comes after the name of the company, the name carries the weight and credibility in the market; it cannot be copied by anybody else. This not helps in building the brand name of the company but also gives a legal protection to the company. Existence until perpetuity: Unlike partnership or proprietorship business, this continuous to be in existence even after the death of the partner or owner and the management just changes. Tax benefits: Generally, the rate of tax on proprietor is the same as that of the LLC, in addition to providing the protection to the personal assets. The profits / losses of an entity is generally gets reported as the personal gains / losses in the tax sheet of the individual however, the same could be avoided by electing the presentation as corporation. However, in corporation, the individual is taxed on both the personal as well as corporation front. However, one can choose tax status as Subchapter S and avoid double taxation.(Anon., 2016) Deduction of expenses: All the expenses pertaining to business are allowed as deduction while calculation of tax to be paid on the profits earned by the entity Other benefits include quick decision-making and distribution of power and capital. In the present era, there are multiple options via which the business can be financed. Some of them which are relevant and suitable as per the business needs are: Mix of own capital and loan capital: This is the most reliable and widely used means of financing as some of the amount is funded by the investors themselves which is initially free of cost and the other part being financed via a loan from the bank or financial institution which comes at an interest rate of 6-8% which will easily be beaten by the rate of returns of the business.(Kamuriwo, et al., 2017) Factoring/ advances from the invoices: This means of funding is being widely used for the current portion or working capital management where the service provider pays the business for the sale done to the customer on advance cutting some portion as the interest and commission. This can be effectively used once the business starts billing to the customer. Crowdfunding or online lending: These 2 means of financing have gained immense popularity in the recent times where the online sites like Kickstarter, act arrange funds from a group of investor who want to invest in a single prospective business and this amount is then given as a business loan and a negligible processing fees is charged. This is known for speed and quick decision-making.(Qi, et al., 2017) One of the financing options as chosen in the previous part was loan from bank or financial institution. Once the loan request is initiated, the banks generally ask for a set of documents including the projected balance sheet, projected income statement, the tax returns of the last 2-3 years for the individuals applying for loan, credit worthiness statement from a credit rating company, etc. An example of the project balance sheet and income statements is shown below:(Das, 2017) With the introduction of IFRS and other accounting requirements and the need for maintenance of internal financial control within the organisation, the need for specific books of accounts have increased. (Minnis Sutherland, 2016) This serves as the basis for audit opinion by the auditors, the preparation of the annual accounts of the company basis which both the internal and the external users of the books of account like the shareholders, creditors, debtors, banks, financial institutions, etc take important and critical decisions. The accounting information prepared will include the necessary disclosures on the management judgements and estimates applied while reporting, depreciation policy used, disclosures of related party transactions, shareholders information, important transactions entered into by the company during the year, the important and critical ratios like the current ratio, debt equity ratio, liquid ration, net profit ratio, return on equity, etc. All the costs would be maintained separately ledger wise so that the proper control is maintained and reconciliation is done after every period to find out the discrepancies. (Keith Cassandra, 2017) Besides all the above-mentioned procedures, financial and management accounting would be done in a computerised system using SAP tool and all the necessary activities like cost control, invoicing, collection, billing, delivery, procurement, etc. would be departmentalized in order to maintain strict internal control and avoid any chances of fraud or misstatement. Financial statement analysis is a very significant tool to be used by the management in taking important economic and business decisions. It involves tabulating the important information of the company in order to give a concise view to the mangers to enable quick and efficient decision-making. Some of its benefits include determining the financial stability and health of the company, the liquidity position of the company and whether the company would be able to pay back to its creditors in time. Its shows to the relevant stakeholders how the management has made effective and efficient utilization of the limited resources in order to maximise the profits. Even the government and the tax and legal authorities make use of the financial statement analysis in order to check the companys fiscal measures the tax to be paid by the company and whether it is a going concern or not. (Goldmann, 2016) It involves analysis of the income statement, balance sheet and the cash flow statement. The analytical tools include key ratio analysis, comparison of the actual data from the past quarter or period and last year, its comparison from the budgeted data or the estimated figures and doing the variance analysis. It also includes the horizontal and vertical analysis and trend comparison with the industry. All this helps the management to get the insights, the weak links so that the corrective action can be taken and control can be increased. (Nakao, et al., 2017) Profits distribution in a business is one of the most significant and critical decisions to be taken. It depends upon the management oversight and planning whether to distribute the profits of not. Some of these factors are: If the cash profits are more with the company and there are no investment opportunities, it would prefer to distribute the cash.(Michaely Jacob, 2017) In case there is a working capital or other business enhancement requirement, which will increase the future profits of the business, then the management may think to retaining the profits in the business and using it for the growth purposes. If there exists an expansion opportunity or a reasonable avenue for investment, which will earn more than the business profits rates, it may consider to invest and not to distribute the profits. The other factor, which may be taken into consideration, is the tax to be paid on redistribution of profit, which unusually increase the tax expenses of the company and hence double taxation. In case the debts are due by the company, the management may first think to pay off the same rather than the distribution of profits to the owners.(Buchanan, et al., 2017) References Anon., 2016. When is a Heads of Agreement legally enforceable?. [Online] Available at: https://legalvision.com.au/heads-agreement-legally-enforceable/ [Accessed 8th August 2016]. Anon., n.d. (FindLaw, 2016). [Online]. Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea. Journal of Applied Business Research, 33(1), pp. 153-172. Buchanan, B., Cao, C., Liljeblom, E. Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197. Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17. Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112. Kamuriwo, D. S., Bellavitis, C. Hommel, U., 2017. Mitigation of Moral Hazard and Adverse Selection in Venture Capital Financing: The Influence of the Countrys Institutional Setting. Journal of Small Business Management, pp. 1-9. Keith, S. Cassandra, L., 2017. CULTURAL IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON THE COMPARABILITY OF FINANCIAL STATEMENTS.. International Journal of Business, Accounting, Finance, 11(1), pp. 46-56. Michaely, R. Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222. Minnis, M. Sutherland, A., 2016. Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans. Journal of Accounting research, 55(1), pp. 197-233. Nakao, S., Oliveira, N. Nardi, P., 2017. Analysis of the influence of audit firms on disclosure in notes to financial statements. Nakao, 14(2), pp. 9-14. Qi, Y., Roth, L. Wald, J., 2017. Creditor protection laws, debt financing, and corporate investment over the business cycle. Journal of International Business Studies, 48(4), pp. 477-497. Solicitors, S., 2016. The Principles of Contract. Contract, p. 13.